Turkey raises 2012 inflation forecast, keeps policy tight

Istanbul: Turkey's central bank raised its forecast for inflation at the end of this year yesterday and reiterated it would have to run a tight monetary policy for some time despite signs of a sharp slowdown in economic growth this year.

The bank has been battling to prevent the Turkish economy from overheating since economic growth surged into double-digits at the start of last year and inflation is expected to come down steadily this year after it hit a three-year high in December.

But Governor Erdem Basci said the bank had raised its forecast for the end of 2012 to 6.5 per cent from the 5.2 per cent shown in a forecast in October, although he said it would still come down to 5 per cent in the medium-term.

Consumer price inflation was 10.45 per cent year-on-year in December, almost double the bank's 5.5 per cent target.

"We expect inflation to maintain these levels in the first quarter of the year and to show a gradual declining trend from the second quarter," Basci told a news conference laying out the results of the bank's latest quarterly inflation report.

He said the mid-point forecast for inflation at the end of 2013 was 5.1 per cent.

Tight monetary policy would continue for some time, he said, but added that the bank did not see additional tightening as necessary under current conditions.

The government forecasts Turkey's economic growth to halve this year to around 4 per cent and the International Monetary Fund barely expects any growth at all.

Flexible

But the figures increased the chances that overall the bank will have to keep borrowing costs higher than previously thought in a "flexible" policy scheme that manipulates borrowing and lending costs for banks through a range of instruments.

"Basci's comments show tight monetary policy will be in place for a while. This supports the lira versus the euro-dollar basket," said Erdinc Mogol, manager of the treasury marketing unit at Akbank.

Last week, the central bank kept its policy rate, the one-week repo rate, unchanged at 5.75 per cent as expected and its overnight borrowing and lending rates at 5 per cent and 12.5 per cent respectively.

But, in line with the "flexible" approach which varies the rates at which it supplies funding to banks, the bank signalled it would push banks to take more funding than previously at expensive one-month repo auctions.

That weakened bond markets and weighed on the lira, as did a decision to halt regular daily sales of foreign exchange which have supported the Turkish currency. Yesterday's figure had a similar impact on markets.

Basci said he expected the lira's appreciation would be reflected in inflation figures from this month or next and that the bank maintained its annual food inflation forecast at 7.5 per cent.

He said that if lira appreciation continues, the bank's inflation target of 5 per cent could yet be reached by the end of 2012.

The lira was one of 2011's worst-performing emerging market currencies with a 20 per cent fall to a record low of 1.9215 against the dollar. It has since recovered to below 1.80 due to a rise in confidence that the central bank will defend the currency.